TY - JOUR T1 - Variance Risk Premia in Energy Commodities JF - The Journal of Derivatives SP - 15 LP - 32 DO - 10.3905/jod.2010.17.3.015 VL - 17 IS - 3 AU - Anders B Trolle AU - Eduardo S Schwartz Y1 - 2010/02/28 UR - https://pm-research.com/content/17/3/15.abstract N2 - This article investigates variance risk premia in energy commodities, particularly crude oil and natural gas, using a robust model-independent approach. Over a period of 11 years, we find that the average variance risk premia are significantly negative for both energy commodities. However, it is difficult to explain the level and variation in energy variance risk premia with systematic or commodity-specific factors. The return profile of a natural gas variance swap resembles that of a call option, while the return profile of a crude oil variance swap, if anything, resembles the return profile of a put option. The annualized Sharpe ratios from shorting energy variance are sizable; although not nearly as high as the annualized Sharpe ratio of shorting S&P 500 Index variance, they are comparable to those of shorting interest rate volatility or variance on individual stocks.TOPICS: Interest-rate and currency swaps, other real assets, VAR and use of alternative risk measures of trading risk ER -